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Optimal share contracts with moral hazard on effort and in output reporting: managing the double Laffer curve effect

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  • Alain de Janvry
  • Elisabeth Sadoulet

Abstract

We explore in this paper the design of optimal share contracts when there is a double moral hazard, one on inputs exclusively provided by the agent (such as effort) and the other in reporting the level of output to be shared with the principal, and when there is a social efficiency cost to under-reporting. The optimal contract is second best in that it allows for residual moral hazard in both effort and output reporting. The model predicts that contract terms will vary with the value to the tenant of unreported output as well as with any capacity of the principal to directly supervise the agent. The model is written for a landlord-tenant share contract but applies as well for tax collection and franchising. Copyright 2007 , Oxford University Press.

Suggested Citation

  • Alain de Janvry & Elisabeth Sadoulet, 2007. "Optimal share contracts with moral hazard on effort and in output reporting: managing the double Laffer curve effect," Oxford Economic Papers, Oxford University Press, vol. 59(2), pages 253-274, April.
    • Handle: RePEc:oup:oxecpp:v:59:y:2007:i:2:p:253-274
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    File URL: http://hdl.handle.net/10.1093/oep/gpl034
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    Cited by:

    1. Oguzhan Akgun & David Bartolini & Boris Cournède, 2017. "The capacity of governments to raise taxes," OECD Economics Department Working Papers 1407, OECD Publishing.
    2. Belev, Sergei (Белев, Сергей) & Zolotareva, Anna (Золотарев, Анна) & Malayrev, Aleksandr (Малайрев, Александр) & Sokolov, Ilya (Соколов, Илья), 2015. "Structural Alternatives to the Tax Administration [Структурные Альтернативы Налогового Администрирования]," Published Papers mn13, Russian Presidential Academy of National Economy and Public Administration.
    3. Ian A. MacKenzie & Markus Ohndorf & Charles Palmer, 2010. "Enforcement-proof contracts with moral hazard in precaution: ensuring �permanence� in carbon sequestration," GRI Working Papers 27, Grantham Research Institute on Climate Change and the Environment.
    4. Heese, H. Sebastian & Kemahlıoğlu-Ziya, Eda, 2016. "Don't ask, don't tell: Sharing revenues with a dishonest retailer," European Journal of Operational Research, Elsevier, vol. 248(2), pages 580-592.

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